Contracts are an essential foundation to any business relationship, setting out a framework for the relationship that contains the legally binding rights and obligations of the parties, and the terms of protection applicable to their confidential information and intellectual property. However, a recent report by the Scottish Law Commission concluded that Scots contract law was outdated, difficult to find and, in places, unclear.
This led to the Contract (Formation and Remedies) (Scotland) Bill which was passed on 14 April this year and is now the Contract (Formation and Remedies) (Scotland) Act 2026.
Not all of the Act is in force as some of its provisions will require separate regulations. The aim of the act is to make the law clearer, though businesses may be relieved to hear that there are no major alterations in the law requiring a significant change in practice. There have, however, been modest changes that businesses should be aware of.
What are the main changes?
The old “postal acceptance rule” has been abolished so, in the rare cases where contracts are concluded by post, a legally binding contract will be constituted when the offer is received, not posted. The increased reliance on faster methods of communication (such as email or direct messaging via chat functions) in the world today, mean that this change is unlikely to have a substantial effect on contract formation.
Of greater significance are changes to contractual remedies. The Act provides that, where a party has had the benefit of a contract but has not yet performed its own obligations (e.g. receiving a service without having paid for it) before a contract has been rescinded, that party should return the benefit and pay a reasonable amount for any use made of it while it was available. Previously, the law on this was unclear.
The law applicable to retention has also changed. Retention is a remedy which permits a party to withhold its contractual performance where the other party is in breach e.g. by not paying sums due under the contract where something hasn’t been delivered. Under the old law, a breach justifying retention had to be “material”, which was a high standard to meet. That requirement will now only be applicable in respect of anticipated breaches, i.e. where retention is in advance of a likely breach, not after it. In most cases, the only requirement will be that the retention is not disproportionate to the breach. This may make retention a more useful self-help remedy to parties facing breaches of contract and could reduce the need for litigation in the event of a breach of contract.
What will the impact of the changes be on businesses?
The impact of the Act is limited to specific, technical reforms; it is not a wholesale update of the law.
It is also worth noting that the changes introduced are default rules only, and that parties are free to contract out of them. For example, a standard clause that may require a customer to pay sums due without deduction, withholding etc., would continue to exclude the wider remedy of retention introduced by the Act. However, the Act does codify parts of the current law on contract formation to be more reflective of modern practice.
The benefit of the Act’s changes to remedies will depend on parties choosing to use them and updating contracts to permit this. If that happens, the Act may have more practical impact in allowing for easier and less costly resolution of disputes.
